EcoSynthetix Inc. Consolidated Financial Statements December 31, 2017 and December 31, 2016 (expressed in US dollars)

Transcription

1 Consolidated Financial Statements (expressed in US dollars)

2 March 2, 2018 Independent Auditor s Report To the Shareholders of EcoSynthetix Inc. We have audited the accompanying consolidated financial statements of EcoSynthetix Inc. and its subsidiaries, which comprise the consolidated balance sheets as at December 31, 2017 and December 31, 2016 and the consolidated statements of operations and comprehensive loss, shareholders equity and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. PricewaterhouseCoopers LLP PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2 T: , F: PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

3 We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of EcoSynthetix Inc. and its subsidiaries as at and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants

4 Consolidated Balance Sheets At December 31 (expressed in US dollars) Assets Current assets Cash 19,116,828 38,517,278 Term deposits (note 5) 30,171,121 - Accounts receivable (note 6) 2,296,255 2,199,289 Inventory (note 7) 2,535,234 3,216,016 Government grants receivable (note 8) - 168,562 Prepaid expenses 153, ,352 54,272,962 44,266,497 Non-current assets Term deposits (note 5) - 15,043,557 Property, plant and equipment (note 9) 7,115,672 7,933,584 Total assets 61,388,634 67,243,638 Liabilities Current liabilities Trade accounts payable and accrued liabilities (note 10) 2,951,220 3,070,203 Accrued termination benefits 39, ,888 Total liabilities 2,991,050 3,486,091 Shareholders Equity Common shares (note 13) 493,631, ,359,612 Contributed surplus 9,550,445 8,740,007 Accumulated deficit (444,784,356) (438,342,072) Total shareholders equity 58,397,584 63,757,547 Total liabilities and shareholders equity 61,388,634 67,243,638 Approved by the Board of Directors (signed) (signed) Paul Lucas, Chairman Jeff MacDonald, Chief Executive Officer The accompanying notes are an integral part of these consolidated financial statements.

5 Consolidated Statements of Operations and Comprehensive Loss For the years ended December 31 (expressed in US dollars) Net sales 17,885,423 13,277,386 Cost of sales 14,215,080 11,076,583 Gross profit on sales 3,670,343 2,200,803 Expenses Selling, general and administrative 6,004,556 6,532,524 Research and development 4,711,913 4,941,081 Provision for termination benefits 63, ,114 10,779,954 12,007,719 Loss from operations (7,109,611) (9,806,916) Interest income 667, ,318 Net loss and comprehensive loss (6,442,284) (9,304,598) Basic and diluted loss per common share (note 18) (0.11) (0.16) Weighted average number of common shares outstanding 59,551,885 59,307,361 The accompanying notes are an integral part of these consolidated financial statements.

6 Consolidated Statements of Shareholders Equity For the years ended December 31 (expressed in US dollars) Common shares Contributed surplus $ Accumulated deficit $ Total $ Balance - January 1, ,182,209 8,017,907 (429,037,474) 72,162,642 Common share options exercised (note 13) 127,347 (60,109) - 67,238 Share-based compensation (note 12) - 832, ,265 Deferred share unit options exercised 50,056 (50,056) - - Net loss and comprehensive loss - - (9,304,598) (9,304,598) Balance - December 31, ,359,612 8,740,007 (438,342,072) 63,757,547 Common share options exercised (note 13) 81,356 (33,739) - 47,617 Share-based compensation (note 12) - 1,034,704-1,034,704 Deferred share units 70,642 (70,642) - - Restricted share units 119,885 (119,885) - - Net loss and comprehensive loss - - (6,442,284) (6,442,284) Balance - December 31, ,631,495 9,550,445 (444,784,356) 58,397,584 The accompanying notes are an integral part of these consolidated financial statements.

7 Consolidated Statements of Cash Flows For the years ended December 31 (expressed in US dollars) Cash provided by (used in) Operating activities Net loss and comprehensive loss (6,442,284) (9,304,598) Items not affecting cash Depreciation 1,229,121 1,340,315 Share-based compensation (note 12) 1,034, ,265 Unrealized foreign exchange gain (60,726) (219) Other (234,891) (228,238) Changes in non-cash working capital Accounts receivable (96,966) (1,021,570) Inventory 629,813 31,168 Government grants receivable (note 8) - (670,081) Prepaid expenses 11,828 77,631 Trade accounts payable and accrued liabilities (118,983) 1,907,494 Accrued termination benefits (376,058) (861,867) (4,424,442) (7,897,700) Investing activities Purchase of property, plant and equipment (note 9) (360,240) (584,773) Purchase of term deposits (note 5) (15,000,000) (15,000,000) (15,360,240) (15,584,773) Financing activities Proceeds from government grants 168,562 1,029,955 Exercise of common share options 47,617 67, ,179 1,097,193 Effect of exchange rate changes on cash 168, ,900 Decrease in cash during the year (19,400,450) (22,200,380) Cash - Beginning of year 38,517,278 60,717,658 Cash - End of year 19,116,828 38,517,278 The accompanying notes are an integral part of these consolidated financial statements.

8 1 Business operations EcoSynthetix Inc. (EcoSynthetix or the Company) is engaged in the development and commercialization of environmentally friendly, bio-based technologies as replacement solutions for synthetic, petrochemical-based adhesives and other related products in the Americas, Europe, Middle East and Africa (EMEA) and Asia Pacific. EcoSynthetix is incorporated and domiciled in Canada. The address of its registered office is 3365 Mainway, Burlington, Ontario, Canada. 2 Summary of significant accounting policies Statement of compliance These consolidated financial statements have been authorized for issuance by the Board of Directors of the Company on March 2, Basis of preparation The consolidated financial statements have been prepared under International Financial Reporting Standards (IFRS), using the historical cost convention except for liabilities related to share-based payment arrangements that are measured at fair value. Use of estimates and judgments The preparation of consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. These estimates are based on management s best knowledge of current events and actions that the Company may undertake in the future. Actual results could differ from those estimates. Significant estimates made by the Company include estimates of useful lives and impairment of property, plant and equipment, share-based compensation, potentially uncollectible accounts receivable, provisions for inventory that are carried in excess of net realizable value and the realizability of deferred income tax assets. Property, plant and equipment are tested for impairment at the end of each reporting period or when events or changes in circumstances indicate the carrying amounts may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash-generating units or CGUs). The recoverable amount is the higher of an asset s fair value less costs to sell and value in use (which is the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. Non-financial assets that have been impaired previously are reviewed for possible reversal of impairment at each reporting date. The Company has determined it has a single CGU, assessed as the entity as a whole, due to the interdependence of the Company s assets and liabilities in generating cash inflows. The recoverable amount of the CGU is highly dependent on projected revenues, expenses and discount rates used in performing an analysis. (1)

9 Basis of consolidation The consolidated financial statements of the Company consolidate the accounts of EcoSynthetix and all of its subsidiaries. All intercompany transactions, balances and unrealized gains and losses from intercompany transactions are eliminated on consolidation. Subsidiaries are all entities wholly owned and controlled by the Company. Foreign currency translation i) Functional and presentation currency Items included in the financial statements of each consolidated entity in the Company s consolidated financial statements are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in US dollars, which is the Company s reporting currency. The functional currency of all entities is US dollars. ii) Transactions and balances Cash Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign currency exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than the Company s functional currency are recognized in the consolidated statements of operations and comprehensive loss. Cash consists of deposits held with banks. Trade receivables Trade receivables are amounts due from customers for products sold in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less a provision for impairment. Financial instruments Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the financial instrument. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. (2)

10 Financial assets and financial liabilities are offset and the net amount reported in the consolidated balance sheets when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the financial asset and settle the financial liability simultaneously. At initial recognition, the Company classifies its financial instruments in the following categories, depending on the purpose for which the financial instruments were acquired: i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Company s loans and receivables comprise accounts receivable, government grants receivable and cash and are classified as current, except for the portion expected to be realized or paid beyond 12 months of the consolidated balance sheet dates, which is classified as noncurrent. Loans and receivables are initially recognized at the amount expected to be received less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method, less a provision for impairment. ii) Financial liabilities at amortized cost Financial liabilities at amortized cost include trade accounts payable and accrued liabilities. Trade accounts payable and accrued liabilities are initially recognized at the amount required to be paid less, when material, a discount to reduce the payables to fair value. Subsequently, trade accounts payable and accrued liabilities are measured at amortized cost, using the effective interest method. Financial liabilities are classified as current liabilities if payment is due within 12 months. Otherwise, they are presented as non-current liabilities. iii) Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Company has the positive intent and ability to hold to maturity. The Company s held-to-maturity financial instrument consists of term deposits. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method less any impairment. Interest is recorded in interest income on the consolidated statements of operations and comprehensive loss. Impairment of financial assets At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Company recognizes an impairment loss on financial assets carried at amortized cost. The loss is the difference between the amortized cost and the present value of the estimated future cash flows, discounted using the financial instrument s original effective interest rate. The carrying amount of the asset is reduced by this amount either directly or indirectly through the use of an allowance account. (3)

11 Impairment losses on financial assets carried at amortized cost are reversed in subsequent years if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. Inventory Inventory is valued at the lower of cost, determined on a first-in, first-out basis, and net realizable value. Inventory costs include the costs of material, contract manufacturing costs, variable overhead and an allocation of fixed manufacturing overhead, including depreciation based on normal production volumes. Net realizable value is the estimated selling price less applicable selling expenses. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. The carrying amount of a replaced asset is derecognized when replaced. Repairs and maintenance costs are charged to the consolidated statements of operations and comprehensive loss during the year in which they are incurred. Depreciation is calculated on a straight-line method to reduce the cost of the asset to its residual value over its estimated useful life. The depreciation period applicable to each category of property, plant and equipment is as follows: Leasehold improvements Computer hardware Machinery and equipment remaining lease term 3 years 2 to 15 years Useful lives and residual values are reviewed and adjusted, if appropriate, at the end of each reporting period. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included as part of other gains and losses in the consolidated statements of operations and comprehensive loss. Provisions Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are measured at management s best estimate of the expenditure required to settle the obligation at the end of the reporting period and are discounted to present value where the effect is material. The Company performs evaluations to identify onerous contracts and, where applicable, records provisions for such contracts. (4)

12 Research and product development costs Expenditures during the research phase are expensed as incurred. Expenditures during the development phase are expensed as incurred, unless it is probable that future economic benefits that are attributable to the asset will flow to the Company and the cost of the asset can be measured reliably. No development costs have been capitalized to date. Government grants Government grants include funding for government research and product development support. Research and product development funding is recognized when there is reasonable assurance the Company has complied with the conditions attached to the funding arrangement and is recognized as the applicable costs are incurred. Research and product development funding is presented as a reduction in research and product development expenses, unless it is for the reimbursement of an asset, in which case it is accounted for as a reduction in the carrying amount of the applicable asset. Revenue recognition Revenue is recognized when the Company has transferred the significant risks and rewards of ownership of the goods to the buyer, it is probable that the economic benefits will flow to the Company, delivery has occurred, and the amount of revenue and costs incurred or to be incurred can be measured reliably. These criteria are generally met at the time the product is shipped or delivered and the risks and rewards have passed to the customer. Revenue is measured based on the price specified in the sales contract, net of discounts and estimated returns at the time of sale. Historical experience is used to estimate and provide for discounts and returns. Cost of sales and gross profit Gross profit is derived from net sales, less cost of sales. Cost of sales includes raw material costs, contract manufacturing costs, freight costs and depreciation related to manufacturing equipment. Raw materials consist of the costs of natural feedstock and process chemicals. Share capital Common shares are classified as equity. The Company has classified all outstanding exchangeable shares of its subsidiaries as issued and outstanding of the parent company. Share-based compensation The Company operates equity-settled share-based compensation plans under which the Company receives services from employees, advisers, officers, directors, contractors and consultants as consideration for equity instruments (share options, performance-based share options (PSOs), restricted share units (RSUs) and deferred share units (DSUs)) of the Company. (5)

13 Each tranche of a share option award is considered a separate award with its own vesting period and recorded at fair value on the date of grant. The fair value of each tranche is measured at the date of grant using the Black- Scholes option pricing model. Compensation expense is recognized over the tranche s vesting period based on the number of awards expected to vest by increasing contributed surplus. The number of awards expected to vest is reviewed periodically with any impact being recognized in the consolidated statements of operations and comprehensive loss. Any contribution paid by an employee or director on the exercise of share options is credited to common shares with any previously recognized compensation expense. A PSO provides a right, but not an obligation, to purchase common shares of the Company at a stated price for a given period of time. PSOs vest at a rate of 33.33% per year following the grant date subject to the achievement of performance hurdles and can only be settled in common shares issued from treasury. In the event that performance exceeds targeted performance hurdles, vesting can accelerate for PSOs granted; however, in no event can the cumulative vesting exceed 100%. All PSOs have an expiry between seven and ten years from the grant date. The fair values of PSOs are recorded over the expected vesting period, subject to management s estimate of the achievement of the performance hurdles. The fair values of the PSOs are recognized as compensation expense over the vesting period with a corresponding increase to contributed surplus. The exercise price is determined based on the average closing price of common shares on the Toronto Stock Exchange (TSX) five trading days immediately prior to the date as of which fair value is determined. The Company has estimated the length of the expected vesting period at the grant date based on the most likely outcome of the performance conditions. The Company will revise its estimate of the length of the vesting period, if necessary, if subsequent information indicates that the length of the vesting period differs from previous estimates and any change to compensation cost will be recognized in the period in which the revised estimate is made with a corresponding change to contributed surplus. Forfeitures are estimated at the grant date and are revised to reflect a change in expected or actual forfeitures. The restricted share unit plan (RSU Plan) provides that restricted share unit awards (the RSUAs) may be granted by a committee that administers the RSU Plan to full-time employees, officers and eligible contractors of the Company or an affiliate in a calendar year as a bonus for services rendered to the Company as determined at the sole discretion of the Board. The number of RSUs awarded will be credited to the participants accounts effective on the grant date of the RSUs. Each RSU entitles the holder to receive common shares issued from the treasury of the Company. RSUs awarded cliff vest at the end of a three-year vesting period subject to continued employment with the Company. Compensation cost is calculated on a straight-line basis over the vesting period with a corresponding increase to contributed surplus. Forfeitures are estimated at the grant date and are revised to reflect a change in expected or actual forfeitures. The deferred share unit plan (DSU Plan) provides for awards of DSUs to non-employee directors of the Company. Under the DSU Plan, non-executive directors may receive a grant of DSUs in satisfaction of their annual retainer. Each DSU is equivalent to one common share and vests on a quarterly basis. DSUs must be retained until the director leaves the Board, at which time the DSUs will be settled through common shares. In the event dividends are declared and paid, additional DSUs would be credited to reflect dividends paid on common shares. The number of DSUs to be awarded is determined based on the average closing price of the common shares on the TSX five trading days immediately prior to the date as of which fair value is determined. The fair values of the DSUs are recognized as compensation expense over the vesting period with a corresponding increase to contributed surplus. (6)

14 Income taxes Income taxes comprise current and deferred income taxes. Income taxes are recognized in the consolidated statements of operations and comprehensive loss, except to the extent that they relate to items recognized directly in shareholders equity, in which case the income taxes are also recognized directly in shareholders equity. Current income taxes are the expected income taxes payable on the taxable income for the year, using income tax rates enacted or substantively enacted, at the end of the reporting period, and any adjustment to income taxes payable in respect of previous years. In general, deferred income taxes are recognized in respect of temporary differences arising between the income tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income taxes are determined on a non-discounted basis using income tax rates and laws that have been enacted or substantively enacted at the consolidated balance sheet dates and are expected to apply when the deferred income tax asset or liability is settled. Deferred income tax assets are recognized to the extent that it is probable that the assets can be recovered. Deferred income taxes are provided on temporary differences arising on investments in subsidiaries and associates, except, in the case of subsidiaries, where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are presented as non-current. Loss per share Basic loss per common share is calculated based on the weighted average number of common shares outstanding for the year. Diluted loss per common share is calculated using the weighted average number of common shares outstanding for the year for basic net loss per common share plus the weighted average number of potential dilutive common shares that would have been outstanding during the year had potentially all common shares been issued at the beginning of the year or when the underlying share options or warrants were granted, if later, unless they were anti-dilutive. Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments under an operating lease (net of any incentives received from the lessor) are recognized in the consolidated statements of operations and comprehensive loss on a straight-line basis over the period of the lease. (7)

15 Operating segments The Company operates in one operating segment that is reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (CODM). The chief executive officer has authority for resource allocation and assessment of the Company s performance and is, therefore, the CODM. New accounting standards Standards issued but not yet effective or amended up to the date of issuance of the Company s consolidated financial statements are listed below. This listing is of standards and interpretations issued, which the Company reasonably expects to be applicable at a future date. a) In July 2014, the International Accounting Standards Board (IASB) issued the final version of IFRS 9, Financial Instruments, which reflects all phases of the financial instruments project and replaces International Accounting Standard (IAS) 39, Financial Instruments - Recognition and Measurement, and all previous versions of IFRS 9. The final version of IFRS 9 introduces new requirements for the classification, measurement and derecognition of financial instruments and introduces a new impairment model for financial assets. IFRS 9 is effective for annual periods beginning on or after January 1, The Company has assessed the impact of IFRS 9 on its interim and annual consolidated financial statements and does not expect a material change on the adoption of this standard. b) In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which replaces IAS 18, Revenue. IFRS 15 covers principles for reporting the nature, timing, amount and uncertainty of revenue and cash flows arising from contracts with customers. IFRS 15 is effective for annual periods beginning on or after January 1, The Company has assessed the impact of IFRS 15 on its interim and annual consolidated financial statements and does not expect a material change on the adoption of this standard. c) On January 13, 2016, the IASB issued IFRS 16, Leases, which will replace IAS 17, Leases. The new standard will be effective for fiscal years beginning on or after January 1, Earlier application is permitted. Under the new standard, all leases will be on the balance sheet of lessees, except those that meet limited exception criteria. The Company is in the process of evaluating the impact of this standard. (8)

16 3 Risk management and financial instruments The Company has classified its financial instruments into one of the following categories: loans and receivables, held-to-maturity and financial liabilities at amortized cost. The following table summarizes information regarding the carrying amounts of the Company s financial instruments: Loans and receivables 21,413,083 40,885,129 Held-to-maturity 30,171,121 15,043,557 Financial liabilities at amortized cost 2,991,050 3,486,091 Liquidity risk The Company has sustained annual losses and negative cash flows from operations since its inception. Liquidity risk is the risk the Company will encounter difficulty in meeting its financial obligations associated with financial liabilities that are settled by delivering cash or another financial asset. The Company is exposed to liquidity risk as it continues to have net cash outflows to support its operations. The Company s approach to managing liquidity risk is to ensure it will have sufficient liquidity to meet liabilities when due. The Company achieves this by maintaining sufficient cash. The Company monitors its financial position on a monthly basis and updates its expected use of cash resources based on the latest available data. The Company s trade accounts payable and accrued liabilities will be paid within the next 12 months. Credit risk Credit risk arises from the potential that a counterparty will fail to perform its obligations. The Company is exposed to credit risk from customers. At December 31, 2017, the Company s four largest customers accounted for 62% ( three customers at 66%) of trade accounts receivable. In order to minimize the risk of loss for accounts receivable, the Company s extension of credit to customers involves a review and approval by senior management. The majority of the Company s sales are invoiced with payment terms up to 63 days. The Company s objective is to minimize its exposure to credit risk from customers in order to prevent losses on financial assets by performing regular monitoring of overdue balances and to provide an allowance for potentially uncollectible accounts receivable. The Company s trade accounts receivable have a carrying amount of $2,012,410 at December 31, 2017 ( $1,915,469), representing the maximum exposure to credit risk of those financial assets, exclusive of the allowance for doubtful accounts. The Company s exposure to credit risk for trade accounts receivable by geographic area at December 31 was as follows: 2017 % 2016 % Americas EMEA Asia Pacific (9)

17 The Company may also have credit risk relating to cash, which it manages by dealing with large chartered Canadian and US banks. The Company s objective is to minimize its exposure to credit risk in order to prevent losses on financial assets by placing its investments in lower risk deposits of these chartered banks. The Company s cash carrying amount is $19,116,828 at December 31, 2017 ( $38,517,278), representing the maximum exposure to credit risk of these financial assets. Approximately 94% ( %) of the Company s cash at December 31, 2017 was held with one financial institution. The Company s exposure to credit risk relating to cash segmented by geographic area at December 31 was as follows: 2017 % 2016 % Canada United States of America The Netherlands Foreign currency risk Foreign currency risk arises because of fluctuations in foreign currency exchange rates. The Company conducts a portion of its business activities in currencies other than the functional currency of the parent company (US dollars). This primarily includes Canadian dollar and euro denominated transactions. The Company s objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows by converting foreign denominated financial assets into US dollars to the extent practical to match the obligations of its financial liabilities. Financial assets and financial liabilities denominated in foreign currencies will be affected by changes in the exchange rate between the functional currency and these foreign currencies. This primarily includes cash, accounts receivable and trade accounts payable and accrued liabilities, which are denominated in foreign currencies. The Company realized foreign currency exchange gains in the year ended December 31, 2017 of $107,327 ( gain of $185,119). The Company has unrealized foreign exchange gains in the year ended December 31, 2017 of $60,726 ( nominal). If a shift in the Canadian dollar relative to the US dollar of 10% were to occur, the foreign currency exchange gain or loss on the net financial assets would be $242,389 ( $396,235) and this amount would be recorded in the consolidated statements of operations and comprehensive loss. If a shift in the euro relative to the US dollar of 10% were to occur, the exchange gain or loss on the net financial assets would be $25,353 ( nominal). Interest rate risk Interest rate risk arises because of the fluctuation in market interest rates. The Company s objective in managing interest rate risk is to maximize the return on its cash. The Company is subject to interest rate risk on its cash. If a shift in interest rates of 10% were to occur, the impact on the consolidated statements of operations and comprehensive loss for the year would be a gain or loss of $26,740 ( $27,159). The Company is not subject to interest rate risk on its fixed rate term deposits. (10)

18 Fair value The carrying amounts of accounts receivable approximate their fair values given their short-term nature. Fair value measurement recognized in the consolidated balance sheets Financial instruments that are measured at fair value are grouped into Levels 1 to 3, based on the degree to which their fair value is observable. Level 1 - Fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical financial assets or financial liabilities. Level 2 - Fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the financial asset or financial liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 - Fair value measurements are those derived from valuation techniques that include inputs for the financial asset or financial liability that are not based on observable market data (unobservable inputs). The Company s financial assets and liabilities at fair value at December 31, 2017 were as follows: Level 1 Level 2 Level 3 Total Cash 19,116, ,116,828 Accounts receivable - 2,296,255-2,296,255 19,116,828 2,296,255-21,413,083 The Company s financial assets and liabilities at fair value at December 31, 2016 were as follows: Level 1 Level 2 Level 3 Total Cash 38,517, ,517,278 Accounts receivable - 2,199,289-2,199,289 Government grants receivable - 168, ,562 During the year, there were no reclassifications into or out of Level 3. 4 Capital management 38,517,278 2,367,851-40,885,129 The Company s objective in managing capital is to ensure sufficient liquidity to pursue its growth strategy and fund research and product development, while at the same time taking a conservative approach toward financial leverage and management of financial risk. The Company s capital is composed of total shareholders equity. The total capital at December 31, 2017 is $58,397,584 ( $63,757,547). The Company s primary uses of capital are financing operations, non-cash working capital and capital expenditures. The Company currently funds these requirements from existing cash resources and cash raised through share issuances. The (11)

19 Company s objectives when managing capital are to ensure the Company will continue to have enough liquidity so that it can provide its products and services to its customers and returns to its shareholders. The Company monitors its capital on the basis of the adequacy of its cash resources to fund its business plan. In order to maximize the capacity to finance the Company s ongoing growth, the Company does not currently pay a dividend to holders of its common shares. 5 Term deposits During the fiscal year ended December 31, 2017, the Company purchased a $15.0 million fixed term term deposit at a fixed rate of 1.6% with interest due on the maturity date of June 19, During the fiscal year ended December 31, 2016, the Company purchased a $15.0 million fixed term term deposit at a fixed rate of 1.74% with interest payments due semi-annually and the final payment due on the maturity date of January 8, Both term deposits were purchased with a large chartered Canadian bank. The carrying value of the term deposit includes accrued interest and is recorded at amortized cost using the effective interest method. The Company has classified the investment as held-to-maturity. 6 Accounts receivable Trade accounts receivable 2,012,410 1,915,469 Commodity taxes receivable and other 283, ,820 The aging of trade accounts receivable at each reporting date was as follows: 7 Inventory 2,296,255 2,199,289 Current 1,871,619 1,897,306 Past due 1-30 days 140,791 18,163 Past due days - - Past due days - - Past due greater than 91 days - - 2,012,410 1,915,469 Raw materials 268, ,557 Finished goods 2,267,201 2,542,459 2,535,234 3,216,016 The Company does not have a recorded provision ( $58,402) against finished goods and raw materials inventory. (12)

20 Inventories recognized as an expense during the year amounted to $11,873,763 ( $9,644,394). 8 Government grants In September 2014, the Company announced that it would receive a grant of approximately $2.0 million from Agriculture and Agri-Food Canada through a national Bioproducts cluster that was developed by BioIndustrial Innovation Canada (the grant). The grant was provided in support of accelerated commercialization for new bio-based platforms targeting the replacement of non-renewable chemicals. The grant could be repayable in the event a condition of default occurs. The Company has met the conditions of the grant in fiscal 2016 and has accordingly recognized this grant in its operating results. The Company has recognized the remaining available balance of the grant in 2016 and accordingly has not recognized any amounts in The total claims for the years ended December 31 were as follows: Operating expenses - 669,960 During the year ended December 31, 2017, the Company collected cash of $114,925 ( $1,029,955) relating to claims under the grant. There is no outstanding balance receivable under the grant for the year ended December 31, 2017 as all claims have been made and collected. (13)

21 9 Property, plant and equipment The composition of the net carrying amount of the Company s property, plant and equipment is presented in the following table: Machinery and equipment Leasehold improvements Computer hardware Total Cost January 1, ,317, , ,380 16,567,938 Additions 484, ,773 Disposals (323,765) (116,697) (209,705) (650,167) December 31, ,478, ,843 92,675 16,402,544 Additions 360, ,240 Disposals (32,015) - (2,584) (34,599) December 31, ,806, ,843 90,091 16,728,185 Accumulated depreciation January 1, 2016 (6,610,224) (948,540) (263,102) (7,821,866) Depreciation expense (1,282,450) - (14,811) (1,297,261) Accumulated depreciation on disposals 323, , , ,167 December 31, 2016 (7,568,909) (831,843) (68,208) (8,468,960) Depreciation expense (1,174,541) - (3,611) (1,178,152) Accumulated depreciation on disposals 32,015-2,584 34,599 December 31, 2017 (8,711,435) (831,843) (69,235) (9,612,513) Net carrying amount December 31, ,909,117-24,467 7,933,584 December 31, ,094,816-20,856 7,115,672 The Company invested $360,240 ( $584,773) in capital asset additions for the year ended December 31, The additions primarily relate to equipment for production. During the year ended December 31, 2017, depreciation expense of $811,329 ( $764,112) has been charged to cost of goods sold, $nil ( $14,811) has been charged to selling, general and administrative expenses and $417,792 ( $561,392) has been charged to research and development. 10 Trade accounts payable and accrued liabilities Trade accounts payable 1,530,410 1,478,184 Accrued liabilities 1,420,810 1,592,019 2,951,220 3,070,203 (14)

22 11 Key management compensation Key management personnel includes those individuals having authority and responsibility for planning, directing and controlling the activities of the Company directly or indirectly. Key management personnel includes the directors, chief executive officer, chief financial officer and other key members of the executive team. The compensation paid or payable to key management personnel for employee services is shown below: Salaries and other short-term employee benefits 1,273,288 1,259,747 Share-based payments 708, , Share-based compensation 1,981,748 1,697,710 At December 31, 2017, the Company had outstanding share options to purchase 4,925,647 common shares of the Company. The share options expire at various dates through January 7, Number of share options outstanding Weighted average exercise price (CA$) Outstanding - December 31, ,350, Share options cancelled (459,108) 2.52 Share options granted 1,116, Share options forfeitures (315,067) 2.36 Share options exercised (90,500) 1.00 Outstanding - December 31, ,602, Share options granted 600, Share options forfeitures (208,328) 1.83 Share options exercised (69,807) 0.89 Outstanding - December 31, ,925, The weighted average contractual life of the outstanding share options at December 31, 2017 is 4.8 years ( years). The total number of share options exercisable at December 31, 2017 is 2,997,620 (2016-2,369,519), which have a weighted average exercise price of CA$1.77 ( CA$1.82) per share. (15)

23 Number of share options outstanding Range of exercise prices $ $ $ $ , ,267 $ $1.50 3,014,990 3,156,603 $ $ , ,510 $ $ ,744 - $ $ , ,748 $ $ , ,327 $ $ ,671 25,342 $ $ $ $ $ $ ,500 24,500 $ $ $ $ $ $ $ $ ,149 71,500 4,925,647 4,602,797 For the years ended December 31, the Company determined the fair values of share options using the Black- Scholes option pricing model with the following assumptions for share option grants: Expected dividend yield -% -% Risk-free interest rate 1.11% 0.63% Expected share option life (in years) 5 5 Volatility 55% 57% The aggregate fair value of share options granted during the year is CA$625,024 ( CA$638,249). The weighted average fair value of the share options is CA$0.80 ( CA$0.57) per share. During the fiscal year ended December 31, 2017, the Company recognized a share-based compensation expense of $715,282 ( $409,812) related to share options with a corresponding increase in contributed surplus. For the year ended December 31, 2017, expected volatility is based on a review of historical volatilities for the Company. The expected share option life is based on the employees historical exercise behaviour. The risk-free interest rate used for each grant is equal to the Canadian treasury bill rates in effect at the date of grant for instruments with a term similar to the expected life of the related share option. (16)

24 a) Performance share options Under the Company s Long-Term Incentive Plan (LTIP), which was adopted in 2013, the Company may issue PSOs to employees, directors and officers in accordance with the Company s 2011 stock option plan (2011 Plan). The purpose of the 2011 Plan is to attract, retain and motivate employees of the Company. During the current fiscal year, the Company issued 600,985 PSOs in accordance with the provisions of the LTIP resulting in a total of 2,155,580 PSOs outstanding at December 31, For the year ended December 31, 2017, the Company determined that a portion of the performance hurdles related to the PSOs were achieved and recognized share-based compensation expense of $603,590 ( $409,812) accordingly. b) Restricted share unit plan On March 5, 2013, the Board approved the adoption of an RSU Plan as part of the Company s LTIP, which was subsequently approved by shareholders on May 8, The purpose of the RSU Plan is to attract, retain and motivate employees of the Company. During the current fiscal year, the Company issued 96,348 ( ,209) RSUs in accordance with the provisions of the RSU Plan resulting in 387,396 RSUs outstanding at December 31, For the year ended December 31, 2017, the Company recorded sharebased compensation expense of $136,136 ( $226,495) related to RSUs that were issued that vested over three years with no performance hurdles. c) Deferred share unit plan On March 5, 2013, the Board approved the adoption of a DSU Plan, which was subsequently approved by shareholders on May 8, During the fiscal year ended December 31, 2017, 79,167 ( ,470) DSUs were issued to non-employee directors of the Company. During the fiscal year ended December 31, 2017, the Company recognized a share-based compensation expense of $183,286 ( $195,957) related to DSUs with a corresponding increase in contributed surplus. At December 31, 2017, 314,558 DSUs were outstanding ( ,345). 13 Common shares The authorized share capital of the Company consists of an unlimited number of common shares. Number of common shares Share capital Balance - December 31, ,275, ,182,209 DSUs exercised 13,456 50,056 Common share options exercised 90, ,347 Balance - December 31, ,379, ,359,612 Common share options exercised 69,807 81,356 Restricted share units exercised 63, ,885 Deferred share units exercised 60,990 70,642 Balance - December 31, ,573, ,631,495 (17)

25 14 Income taxes The difference between income tax expense and the income taxes as computed based on the statutory rate is as follows: Net loss before income taxes (6,442,284) (9,304,598) Income tax benefit at statutory rate (1,707,204) (2,465,718) Cost (benefit) resulting from Research and development credit (35,622) (53,260) Deferred income tax assets expired 1,296 1,548 Change in tax rate 5,203,138 - Deferred income tax assets not recognized and other (3,461,608) 2,517, The reduction of the Federal corporation tax rate in the United States from a maximum rate of 35% to a flat rate of 21% was substantively enacted on December 22, 2017 and will be effective from January 1, As a result, the relevant deferred tax balances have been remeasured. The impact of the change in tax rate is a net expense of $5,203,138 as follows: Net operating loss carry-forward 5,502,955 - Deferred compensation and other (299,817) - 5,203,138 - Estimated temporary differences in the timing of recognition of expenses for accounting and income tax purposes at December 31 result in deferred income taxes as follows: Estimated deferred income tax assets attributable to Net operating loss carry-forwards 24,701,453 28,992,509 Research and development credits 2,871,226 2,689,455 Other deferred income tax assets 2,775,414 2,092,035 Deferred income tax assets 30,348,093 33,773,999 Deferred income tax assets not recognized and other (30,348,093) (33,773,999) Net deferred income tax assets - - (18)

26 The estimated net operating loss carry-forwards and estimated research and development credits expire as follows: United States of America Canada and the Netherlands Canada Net operating loss carryforwards Research and development credits Net operating loss carryforwards Research and development credits Year ending December 31, ,421-10, ,561,172 11,664 12, ,063,163 42, , ,564,511 55,822 1,175, ,338,594 52, , ,321,285 44,965 2,159, ,532,264 46, , ,629,456 47, , ,562,856 41,905 2,160, ,011,361 35, ,717,038 69,118 2, ,854,334 63, ,207,399 96,302-43, ,927,982-2,855, , ,127,104-4,060, , ,855,248-7,773, , ,333,972-11,565, , ,058,892-17,752, , ,275,377-6,899, , ,390, , Commitments The Company has entered into the following financial commitments: 42,330, ,794 61,404,203 2,869,239 Year ending December 31, ,609, , ,009 Thereafter - $ 2,193,047 During the normal course of operations, the Company may enter into feedstock contracts to secure raw material availability over a 12-month period based on market pricing at the time of purchase. At December 31, 2017, the Company was committed to purchases of feedstock of approximately $954,232. (19)